Mortgage Market Monitor February 2016

Monthly Commentary


Market Update

Similar to other risk assets, Non-Agency RMBS began the month in a difficult landscape as the same concerns that weighed on the market in January, mainly those over oil and China, carried over to February. However, that did not stop one of the GSEs from putting out a bid list early in the month, which consisted of eight bonds totaling 365mm and traded in line with expectations. Altogether, the first week saw a decent amount of supply that reached almost 2bn, though precise color was limited and the number of line items not trading was high. Over the course of the second week, heightened macro volatility and weakness dampened the motivation of accounts to sell, leading to the cancellation of several bid lists and a drop in total volume to under 1.6bn. Bonds that were kept by sellers continued to disproportionately outnumber those that traded due to a combination of wider bid-ask spreads and lower levels of participation on lists. While subdued volumes persisted the following week, partly the result of a holiday, sentiment began to shift as broader markets rebounded. Stocks and oil bounced from two year and twelve year lows, respectively. Even though nonagency spreads didn’t necessarily tighten in sympathy, the overall tone felt better. As February month-end and the annual ABS conference (Feb 28 - Mar 2) approached, it seemed like accounts were trying to take advantage of the improved environment and fit in as much selling as they could over the last full week. The 2.3bn in supply, which included a 496mm GSE list consisting of seasoned subprime and Alt-A collateral, was the largest weekly amount tallied so far this year and capped off February with a total of 7.2bn.

February was supposed to be the month in which the long awaited 8.5bn Countrywide settlement would finally be paid. However, instead of receiving a payout, investors were left with disappointment as Bank of New York Mellon (trustee of the 530 deals included in the settlement) filed a petition on February 5 to the NY state court for judicial instruction regarding the distribution waterfall. There are varying opinions on the interpretation of the pooling and servicing agreement (PSA) that would affect investors differently depending on their placement in the capital structure. As a result, the trustee is seeking clarification on the proper distribution procedure for paying bondholders. Meanwhile, with the final payment date delayed and uncertain, the 8.5bn settlement has been deposited into an escrow account where investment proceeds will also be allocated to bondholders.

In risk sharing, Fannie Mae priced its first deal of the year on February 10, 945mm CAS 2016-C01, which also debuted first loss B tranches. The transaction was downsized from an initial size of 949.5mm and priced wider than guidance - 195dm, 675dm and 1175dm for 1M1, 1M2, and 1B, respectively, and 210dm and 695dm for higher LTV 2M1 and 2M2, respectively (2B was rescinded due to lack of support and interest).

Collateral Performance

Changes in serious delinquencies were mixed in February. Prime delinquencies increased by 6 basis points to 6.81%; Alt-A delinquencies increased by 1 basis point to 15.77%; Option Arm delinquencies decreased by 6 basis points to 23.85% and Subprime delinquencies increased by 19 basis points to 30.13%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments decreased across all sectors this month. Prime CRRs came in at 12.4%, down 356 basis points month-over-month; Alt-A CRRs were 9.7%, down 134 basis points month-over-month; Option Arm CRRs were 4.5%, down 77 basis points month-over-month and Subprime CRRs were 4.2%, down 68 basis points month-over-month. CDRs also decreased across all sectors. Prime CDRs decreased by 37 basis points to 1.39%; Alt-A CDRs decreased by 25 basis points to 3.61%; Option Arm CDRs decreased by 75 basis points to 4.64% and Subprime CDRs decreased by 86 basis points to 5.11%.

Case-Shiller futures continue to reflect a broad recovery in home prices, predicting home prices will rise three percent annually during the next four to five years. Year-over-year, home prices are up 5.4% across Case-Shiller’s 20 major city index. At the national level, changes in severities were mixed again. At the state level, California Subprime severities increased to 53% this month. Florida Subprime severities increased to 87%. New York Subprime severities decreased to 88%; and Nevada Subprime severities decreased to 70%.

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